The Finance 202: Trump pledged to slash a key break for investment managers. Here's the inside story of how he failed.

It’s arguably the biggest mystery in the story behind the GOP’s massive tax overhaul: How did the carried interest provision — a quirk of the code benefiting the wealthiest of the wealthy, one that President Trump campaigned on eliminating — manage to endure largely intact in the final product?

Gary Cohn, the president’s chief economic adviser, calls the language's survival his leading regret. “We probably tried 25 times,” he said Wednesday at an Axios event. “We hit opposition in that big white building with a dome every time.” And another administration official didn’t deny the boost for investment fund managers, though slightly adjusted, remained in force:

Senior White House official on carried interest: "We were unsuccessful in getting that deduction removed, we hope to fight another day on that one."

The quiet victory by investors in private equity, real estate and venture capital owes to a carefully plotted lobbying campaign, the details of which are only now starting to emerge. The industry set itself up for the win by getting to work early — and taking advantage of an apparent split between President Trump’s most trusted economic whisperers. The result, a paper cut to investor profits relative to the guillotining that candidate Trump promised, stands to critics as a testament to the broader bill’s tilt in favor of the .1 percent.

Trump, since stepping onto the national stage, has made eliminating the carried interest benefit a refrain. “These are guys that shift paper around and they get lucky,” he said in September 2015 of those “getting away with murder” through the loophole. “One thing I’d do is get rid of carried interest,” he said in an October 2016 debate. And this spring, he declared it all but settled in an appearance on CBS’s "Face the Nation": “Carried interest was great for me too. But carried interest was unfair, and it's gone."

But it isn’t gone.

At issue is the treatment of what fund managers collect when one of their investments hits pay dirt. While these professionals already collect a fee for their work, they also typically pocket a fifth of the windfall from successful bets. The profits can be huge. But rather than paying the 39.6 percent top marginal rate that would apply to ordinary income, fund managers instead can access the 23.8 percent levy that applies to capital gains.

Trump. (Olivier Douliery/Bloomberg)

The provision been criticized by both parties over the last decade — and from other financiers, too. As Allan Sloan recently wrote in The Post: “After all, if you run a mutual fund and get a bonus based on your investment performance, that bonus is treated as earned income, not capital gains. So why should things be different for managers of a private equity or venture capital or hedge fund?”

Taxing the gains as ordinary income would raise an estimated $18 billion over a decade. Instead, the tax bill only nipped at the break: It requires fund managers to hold an investment for three years, up from the current one year, in order to qualify for the lower rate. The change will yield $1.2 billion. (In the context of a package slashing taxes by $1.5 trillion, the roughly $17 billion Republicans are leaving on the table isn’t huge; but it would be more than enough, say, to reauthorize the health insurance program for low-income children lawmakersallowed to lapse three months ago.)

“What they’re doing isn't meaningful. It’s kind of a bad joke, really,” says Victor Fleischer, a law professor at the University of San Diego who first brought policymakers’ attention to the provision more than a decade ago.

Perhaps more significant is the symbolism of Trump making good on a promise to stick it to some of his uber-wealthy peers in the name of evening the score for his base.

Cohn said Wednesday the president privately bird-dogged the matter all the way through the tax debate. But Trump’s other top tax hand, Treasury Secretary Steven Mnuchin, took a different approach from the start. In a written follow-up to his January confirmation hearing, Mnuchin answered a question from Sen. Sherrod Brown (D-Ohio) about whether he supported "repealing carried interest” by noting the administration’s plan would "recommend repealing carried interest on hedge funds.”

Treasury Secretary Steven Mnuchin. (Andrew Harrer/Bloomberg)

The phrasing was subtle but significant. In loose talk about the matter, some, Trump included, describe the provision as a sop to hedge-fund managers. In fact, most in that sector don’t hold investments long enough to benefit from the capital-gains break.

But the Treasury secretary’s framing suggested a strategy for those in private equity, real estate and venture capital who do benefit: Instead of full repeal, urge a compromise that protects the break for longer-term investments because they do more for economic growth than rapid-fire transactions.

An informal coalition of industry groups for longer-term investors — the American Investment Coalition (representing private equity firms), the National Venture Capital Association, the Real Estate Roundtable, and a handful of smaller shops — held weekly conference calls to coordinate their efforts. Not included: the hedge fund-backed Managed Funds Association.

Like sharp investors, the lobbyists representing them spotted an early opportunity and lunged. Long before congressional tax writers began detailing their proposals, the industry groups helped recruit 22 House Republicans to write to House Ways and Means Committee Chairman Kevin Brady (R-Tex.). Their June 13 letter, spearheaded on the Hill by Rep. Richard Hudson (R-N.C.), urged the panel not to “arbitrarily punish investors in real estate, venture capital, private equity and other partnerships.” The tax package, they wrote, needed to bolster “long-term investment in American companies.”

The members' signatures carried as much weight as its words: They represented nearly enough votes to sink a bill. And they came from members spanning the House GOP’s ideological spectrum. Leaders could bet more would join them if push came to shove.

Indeed, this fall, when it came time to produce the bill, the industry counted on a powerful ally in Brady himself (his home state of Texas led the nation last year in private-equity dollars invested, with nearly $80 billion, according to data from the American Investment Council). Mike Sommers, a former chief of staff to then-Speaker John Boehner (R-Ohio) who now leads the private- equity lobby, called the Ways and Means decision to extend the holding period for investments the “product of a negotiation.”

”What the lawmakers did is they made a distinction between long-term and short-term investment, which is what the president advocated for in the campaign,” Sommers said.

Sommers dismissed as a “fantasy” the suggestion that his industry preserved what amounts to a carve-out. “Most of my members don’t love the language in the bill and would prefer normative tax law,” he said. “But there was a recognition because of the politics that there had to be some change to get at what the president suggested… On balance this was better than what [Sen.] Elizabeth Warren [D-Mass.] and others wanted to do.”

Challenged on the provision in a Tuesday appearance on MSNBC’s “Morning Joe,” Brady didn't arguethe industry stands to take a hit. Rather, he called it a distraction. “For most Americans, they could care less about that,” he said.

Watch it get uncomfortable here:

And over on the typically friendlier airwaves of Fox Business Network, anchor Trish Regan laced into Republicans for protecting “private equity fat cats.”

Watch her here:

You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.

In a few swift moves this week, 10-year Treasury yields smashed above key levels to the highest since March. The yield curve, which had been relentlessly flattening, steepened the most since September 2016, while market-implied inflation rates reached an eight-month high as U.S. tax cuts were on the brink of becoming law.

Wall Street doesn’t expect technology stocks to repeat 2017’s banner year that has seen the sector return almost twice as much as the S&P 500 index. After four consecutive years of outperformance, tech companies face mounting concerns about the potential for increased government regulation and continued rotation by investors into higher-taxed industries as a result of U.S. tax reform. Most analysts see the bull market continuing, but at a less ferocious pace. Here’s a look at their predicti

Bloomberg

MONEY ON THE HILL

TAX FLY-AROUND:

Who gains and who loses under the tax bill:

— Companies announce bonuses, pay hikes, investments. Bloomberg's Matthew Townsend: "In the run-up to the bill’s passage, U.S. chief executives had made few specific promises about using savings from a big reduction in the corporate tax rate to create jobs or invest in the country. That changed on Wednesday. As the bill raced through Congress, Boeing Co. announced it would invest $300 million in a combination of employee training, improved workplace infrastructure and corporate giving. About an hour later, AT&T Inc. said 200,000 U.S. workers -- including all union members -- would each get a $1,000 bonus to celebrate. Trump cited AT&T’s plan at a news conference Wednesday...

Fifth Third Bancorp went further, saying it would raise its minimum hourly wage to $15 and distribute a $1,000 payout to 13,500 employees. Wells Fargo, the nation’s largest mortgage lender, joined Fifth Third on the pay raise to $15 an hour, while also pledging $400 million to community and non-profit organizations next year. Cable giant Comcast Corp. said about 100,000 workers would get $1,000 holiday bonuses and pledged more than $50 billion in infrastructure investments over the next five years."

Are these PR moves? Sure, at least partly.Would they have done some of it anyway? Sure.Are these real jobs, bonuses, and investments? Yes.Are they made possible by tax reform? In significant part, yes.

Isn’t there something creepy about corporations giving cash bonuses to employees explicitly because of the passage of certain legislation or because of specific regulatory actions? Doesn’t it have something of a Road to Corporatist Serfdom feel to it?

— Others have to wait. The Post's Renae Merle and Aaron Gregg: "Workers will see the first glimpse of a tax cut in February at the earliest, but it won’t be until 2019 — when people file their taxes for next year — that most will know whether they will pay more or less to the federal government. In the meantime, tax attorneys, accountants and corporate payroll departments are scrambling to adjust to changes that won’t be official until Trump signs the bill in January. Homeowners are already peppering local officials with questions about whether they can — and should — prepay their 2018 property taxes in the less than a dozen days left in 2017, before new limits on such deductions take effect. Others are asking their accountants whether there are expenses — such as moving costs — that they should pay now before they are no longer eligible for preferential tax treatment."

CNN made this calculator to help you find out what the tax law will mean for your paycheck.

— Trump stands to save millions. The Post's Drew Harwell: "Trump, who won the White House on a wave of populist promises, will likely save millions of dollars, thanks to Congress’s approval of a tax plan he pledged was designed for the middle class. Trump, who said he would be a “big loser” if the bill passed, stands to gain immensely from the Republican tax overhaul, including through a lower top tax rate and lucrative deductions for top-earning households, according to attorneys and tax experts who reviewed the final bill. Trump could also take advantage of benefits that will lift specific business sectors, including a last-minute tax deduction that helps many owners of high-value commercial real estate, the industry where he first made his fortune."

Trump opened his last Cabinet meeting of the year by praising Republicans for passing the tax package:

And he's been tweeting about it, too:

The Tax Cuts are so large and so meaningful, and yet the Fake News is working overtime to follow the lead of their friends, the defeated Dems, and only demean. This is truly a case where the results will speak for themselves, starting very soon. Jobs, Jobs, Jobs!

The Massive Tax Cuts, which the Fake News Media is desperate to write badly about so as to please their Democrat bosses, will soon be kicking in and will speak for themselves. Companies are already making big payments to workers. Dems want to raise taxes, hate these big Cuts!

— Will sign Jan. 3. Bloomberg's Erik Wasson: "Trump plans to sign the tax bill on Jan. 3 to ensure automatic spending cuts to Medicare and other programs don’t take effect, according to a House Republican aide familiar with the plans. The White House informed House GOP members of the timetable, following the likely decision by House Republicans to leave the so-called PAYGO provision out of a year-end spending deal to avoid a government shut down before Friday, the person said who asked not to be named because the plan hasn’t been publicly announced."

— Rs celebrate. And heap praise on Trump. The Post's John Wagner: "As he stood outside the White House on Wednesday... Trump basked in the praise of Republican lawmakers assembled around him. He was lauded for his 'exquisite presidential leadership.' He was touted as 'one heck of a leader' and as a 'man of action.' The occasion was a celebration of the final passage of the GOP tax bill, by far the most significant legislative achievement of Trump’s tumultuous first year in office. But the adulation from the Republican lawmakers signaled an even bigger moment: Many were embracing not only a shared accomplishment with Trump, but also his un­or­tho­dox presidency itself... 'This has been a year of extraordinary accomplishment for the Trump administration,' crowed [Senate Majority Leader Mitch] McConnell [R-Ky.], who proceeded to praise the president for tackling the “overregulation of the American economy” and for winning Senate confirmation of a dozen nominees to federal circuit courts."

They finally got what they want from Trump. Politico's Eliana Johnson: "In the past three months of 2017, Trump has quietly racked up a series of policy victories that Republicans have eyed for years, securing the passage not only of the tax overhaul, but also reversing the contours of Obama-era foreign policy and confirming a spate of judges to the federal bench. Over the past week, even Republicans have appeared surprised at their own successes. 'Did you believe we'd ever be at this day, with this bill, on this floor, with the outcome that we know is going to happen?' House Majority Leader Kevin McCarthy asked reporters just before a first House vote on the tax bill."

— Loophole benefits dozens of members. CNBC's John W. Schoen: "The provision, which gives favorable tax treatment to a common form of real estate income, would also create generous tax saving for President Donald Trump, who derives much of his personal fortune from real estate. The measure — added late Friday to the $1.5 trillion package of tax cuts — reduces the tax rate on "pass-through" income derived from real estate. Owners of such businesses are allowed to "pass through" the profits from these enterprises to their individual tax returns, which lowers the amount of tax they owe. Those benefits will now go to roughly four dozen Republican House and Senate members who voted for the bill, according to an analysis of personal financial disclosures for CNBC by the Center for Responsive Politics. They include Sens. Ron Johnson of Wisconsin, Bob Corker of Tennessee and James Inhofe of Oklahoma and Reps. Diane Black of Tennessee and Vern Buchanan of Florida."

— Trump tries to defy economic odds.NYT's Patricia Cohen: "When President Trump adds his distinctive signature to the tax bill, he will also be making a huge bet that the Republican strategy of deep cuts for businesses and wealthy individuals will fuel extraordinary growth across the board.Perhaps more than any other American political leader, Mr. Trump knows that long shots, like his own presidential bid, sometimes pay off. In that vein, he and congressional Republicans are arguing that their bitterly contested and expensive rewrite of the tax code will ultimately create more jobs and raise wages. If they are proved correct, they will be repudiating not only historical experience, but most experts. From Congress’s own prognosticators to Wall Street’s virtuosos, scarcely any independent analyses project anything like the rosy forecasts offered by the president’s top economic advisers."

— Off message. Trump at a Cabinet meeting Wednesday, via CNBC: ""Our plan also lowers the tax on American business from 35 percent all the way down to 21 percent. That's probably the biggest factor in this plan." And Ryan said "nobody knows "whether the bill will pay for itself: "Nobody knows the answer to that question because that's in the future," he replied, "but what we do know is that this will increase economic growth."

— Dems ready assault.The Post's Dave Weigel: "In just six seconds, the new ad from the Democratic Senatorial Campaign Committee previews an attack that will have millions of dollars behind it in 2018. 'The Republican tax scheme gives huge breaks to corporations but raises taxes on middle class families,' says a narrator, as a woman checks her mailbox and recoils. Democrats, routed but unified against the tax bill, plan to make it the centerpiece of a midterm campaign — one that may play out in a growing economy where the worst predictions about the tax cuts fall flat. Republicans, who once hoped that Democrats would feel pressured to back the bill, now suggest that voters will learn that the Democrats misled them... These tax cuts, arriving during a period of economic growth, might be more noticeable. But Democrats are raring to point out the difference between what Republicans ran on and what they passed."

— How it happened. The Post's Mike DeBonis and Erica Werner: "In the days leading up to a critical Senate vote this month on the GOP tax plan, Republican Sen. Rob Portman (Ohio) met secretly with Sen. Joe Manchin III (W.Va.) in the moderate Democrat’s hideaway office in the basement of the Capitol. Manchin told Portman that he would consider joining the tax effort, if only a few changes were made. Chief among them: Instead of cutting the corporate tax rate to 20 percent, a top Republican goal, reduce it to 25 percent — and use the proceeds for bigger middle-class tax cuts. Other Democrats, Manchin suggested, might follow. Portman took the request to Republican leaders, who rejected it.

For Republican leaders, the prospect of a bipartisan deal that could have solidified public support for the tax plan was far outweighed by the imperative to keep the GOP unified and the belief that deep cuts in corporate taxes, more than anything else, were the recipe for economic and political success. 'I would have preferred for it to have been bipartisan,' Portman said. 'There were certain things that he was looking for that didn’t fit with the consensus that we had reached with the Republican conference.'"

— Puerto Rico loses, again. The Post's Ed O'Keefe: "Puerto Rico’s governor is warning that the sweeping tax plan passed by congressional Republicans on Wednesday could deliver a 'crippling blow' to the island’s already-fragile economy, still reeling from the effects of major hurricanes... The tax bill... includes a new 12.5 percent tax on profits derived from intellectual property held by foreign companies — a move designed to compel those companies to move back to the United States. Puerto Rico is considered part of the United States in all realms except taxes — meaning that island residents don’t pay federal income taxes but do pay into Social Security. Companies based on the island are treated as if they were located in other Caribbean tax havens not under an American flag."

— Could trigger Fannie, Freddie loss. WSJ's Andrew Ackerman: "Enactment of the Republican tax plan could trigger a roughly $14 billion accounting loss at Fannie Mae and Freddie Mac, leading to the first taxpayer-funded infusion since they became profitable firms in 2012. At issue is an accounting change tied to lower corporate tax rates in the legislation, which requires the companies to recognize losses on around $45 billion in tax-deferred assets they hold. The decline in the tax rate to 21% from 35% will require the companies to write down the value of those assets, resulting in losses to the companies. Since they have little capital and must sweep their profits to the Treasury, they will likely need a new, one-time infusion from government coffers."

Sen. Susan Collins (R-Maine). (Reuters/Joshua Roberts)

— Inching toward a spending patch. NYT's Sheryl Gay Stolberg and Yamiche Alcindor: "An end-of-the-year showdown that was once promised over delicate issues like immigration, health care and surveillance appeared to fizzle on Wednesday as key Republicans dropped their demands to shore up shaky health insurance markets and Democrats appeared to abandon their goal to force adoption of a measure protecting young undocumented immigrants from deportation. Instead, Congress moved toward a one-month punt that would keep the government funded into January and once again put off policy confrontations... Only days ago... Susan Collins... said she would vote for the tax bill because she had secured a promise from... McConnell... to include two health care provisions to stabilize insurance markets in an end-of-the-year spending measure. On Wednesday, she dropped that demand and said she hoped it would be passed in early 2018."

What's next after taxes? The White House is debating infrastructure, welfare reform and the Opioid Crisis.

Heather Long

Robert Mueller. (MICHAEL REYNOLDS/EPA-EFE)

RUSSIA WATCH:

— House Rs probe DOJ, FBI. Politico's Kyle Cheney and John Bresnahan: "A group of House Republicans has gathered secretly for weeks in the Capitol in an effort to build a case that senior leaders of the Justice Department and FBI improperly — and perhaps criminally — mishandled the contents of a dossier that describes alleged ties between President Donald Trump and Russia, according to four people familiar with their plans.

A subset of the Republican members of the House intelligence committee, led by Chairman Devin Nunes of California, has been quietly working parallel to the committee's high-profile inquiry into Russian meddling in the 2016 presidential election. They haven't informed Democrats about their plans, but they have consulted with the House's general counsel.

The people familiar with Nunes' plans said the goal is to highlight what some committee Republicans see as corruption and conspiracy in the upper ranks of federal law enforcement. The group hopes to release a report early next year detailing their concerns about the DOJ and FBI, and they might seek congressional votes to declassify elements of their evidence."

— Little GOP urgency to protect Mueller. The Post's Karoun Demirjian: "Republican senators who worked swiftly last summer to help write legislation protecting special counsel Robert S. Mueller III now are showing little urgency to get those measures passed. The legislation, which would allow a panel of federal judges to review orders to fire the special counsel, was intended to prevent... Trump from pushing out Mueller before he completes his investigation of Russian meddling in the 2016 election. But two different bipartisan proposals have been mired in negotiations for months. And despite continuing signs from the president that he is unhappy with Mueller’s investigation — which prompted the initial call for the legislation — Republicans appear to be losing their resolve to act."

— Warner warns. Bloomberg's Steven Dennis: "While Trump has said he isn’t planning to fire Mueller, Senator Mark Warner said Wednesday that he continues to worry about that prospect. Warner cited what he said appeared to be a “coordinated” campaign to dismiss the special counsel or others in the Justice Department emanating from some right-wing media outlets and echoed by some members of the House. 'Congress must make clear to the president that firing the special counsel or interfering with his investigation by issuing pardons of essential witnesses is unacceptable and would have immediate and significant consequences,' Warner said on the Senate floor."